"Using a change
in regulatory fees in Canada in April 2012 that affected algorithmic quoting
activities, we analyze the impact of high frequency quoting and trading on
market quality, trader behavior, and trading costs and profits. Following the
change, algorithmic message traffic, i.e. the number of orders, trades, and order
cancellations, dropped by 30% and the bid-ask spread rose by 9%. Using trader-level
data, we attribute this change to message-intensive algorithmic traders reducing
their activity, and we show that their reduced activity had a negative impact on
retail traders’ intraday returns, in particular on their returns from limit orders.
We further find that institutional traders’ intraday returns from market orders
increased."
